United Community Banks, Inc. (NASDAQ:UCBI) Q1 2022 Earnings Conference Call April 20, 2022 11:00 AM ET
Company Participants
Lynn Harton – Chairman & Chief Executive Officer
Jefferson Harralson – Chief Financial Officer
Rich Bradshaw – President & Chief Banking Officer
Rob Edwards – Chief Risk Officer
Conference Call Participants
Jennifer Demba – Truist
Brad Milsaps – Piper Sandler
Catherine Mealor – KBW
Michael Rose – Raymond James
Brody Preston – Stephens Inc
Kevin Fitzsimmons – D. A. Davidson
David Bishop – Hovde Group
Operator
Good morning, and welcome to United Community Bank’s First Quarter 2022 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards.
United’s presentation today includes references to operating earnings, pretax, precredit earnings and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the Financial Highlights section of the earnings release as well as at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the first quarter’s earnings release and investor presentation were filed last night on Form 8-K with the SEC, and a replay of this call will be available in the Investor Relations section of the company’s website at ucbi.com.
Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on pages 5 and 6 of the company’s 2021 Form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website.
At this time, I will turn the call over to Lynn Harton.
Lynn Harton
Good morning, and thank you all for joining our call today. The first quarter was a great one for United and certainly an interesting one from a more macro perspective. Our results this quarter include the acquisition of Reliant, and as a reminder Reliant provides us with $3 billion in exposure to Middle Tennessee, primarily the Nashville MSA.
Reliant has been recognized as the best performing small bank in Tennessee for several consecutive years. And we’re excited and fortunate to have them as part of our team and our ongoing performance story.
The normal Double Dip acquisition loan loss provision for Reliant impacted our reported results as noted in the release in the presentation deck. Absent this provision and other merger charges, our operating return on assets would have been 1.1%, and our return on tangible common equity would have been 13.9%. Both solid numbers we’re proud to present.
We continue to see strong loan and deposit growth. Deposit growth, despite flat deposit cost was almost 7% annualized on an organic basis, excluding the impact of Reliant.
We experienced one of our best organic long growth quarters at over 9% annualized, again, excluding the impact of Reliant and PPP. We expect to continue to take advantage of the strength of our markets and ongoing large bank merger disruption for the foreseeable future.
Beyond the quarter, I continue to be very optimistic. Yes, inflation is a concern. But I’m also reminded that real GDP growth has been very strong and it’s now back up above pre-pandemic levels, and our markets in the southeast are outperforming the country as a whole.
Increasing interest rates bring both opportunities and challenges dependent upon the pace and scale of increases. I believe the economy is strong enough to withstand the type of rate increases the market is currently predicting. And actually rate increases in those amounts should be healthy for the economy long term.
While we are continuously scanning for the first signs of credit stress, we have not seen any weakness to date, and are confident in our underwriting and approach to concentration management regardless of how the environment develops.
Finally, we continue to be excited about our culture and mission. Last week, we completed our Annual Spring Leadership Conference, bringing together about 200 of our leaders across the company for a two day event focusing on the future of the industry and our own future. And I can tell you that group is as excited and as connected as I have ever seen them.
So Jefferson now why don’t you give us more detail on the quarter. There are more moving parts this quarter than normal. And I know our audience will appreciate your view on our performance and outlook.
Jefferson Harralson
Thank you, Lynn. I am going to start my comments on page 8 and talk about what we believe is one of the core strengths of the company, and that’s the deposit franchise. The mix is attractive with 38% of the deposits being DDA, and it’s also 92% non-time [ph] Plus we grew core transaction deposits by $478 million in the quarter. We’re at a 13% annualized pace, while keeping the cost at 6 basis points of total deposits.
Another key piece of our strategy and culture can be seen on page 9 with a look at our loan portfolio. The portfolio is C&I heavy, very diversified and very granular. Adjusted for the Reliant deal and the Reliant related loan sale, we had our strongest loan growth in some time at 9.4% annualized. The strong loan growth was driven by C&I and commercial construction. And we are optimistic about the growth prospects for the rest of the year.
On page 10 we saw some nice margin expansion this quarter, which we will talk about in the next pages. But we really have a nice medium to long term opportunity to remix our assets. And some of this came to pass in Q1 with some help from Reliant.
Our loan to deposit ratio moved to 68% from 64%. And our wellness to asset ratio moved to 59% from 56%, as our cash to assets ratio moved to 8% from 11%, all the beginning of a trend that should help our profitability over time.
On page 11, our capital ratios came in as expected with the Reliant deal close and we are now riding along with our peer group. Our TCE and tangible book per share were down with a sharply higher rate environment and the corresponding decrease in OCI. Given our balance sheet flexibility with a low loan to deposit ratio, we moved about a billion dollars of our securities to the held to maturity classification this quarter, and specifically, the held to maturity to total securities moved to 38% of the portfolio from 20%. There were no buybacks in the quarter, but we do have a $50 million authorization in place.
Moving to page 12, we have a good story in our spread income and net interest margin this quarter. Our net interest margin was up 16 basis points, but excluding PPP fees and loan accretion, the core net interest margin was up 24 basis points. Of the 24 basis points of core margin expansion, 15 basis points came from blending in the higher margin Reliant into our numbers, and another 9 came from putting excess cash to work and other mix change improvements, along with higher rates.
We could talk about asset sensitivity too in the Q&A, but we do benefit significantly from higher rates. With the speed and size and energy of the expected rate hikes, it’s hard to estimate deposit betas. But given our high level of cash, our low loan to deposit ratio, and the quality of our deposit base, we believe we are as well positioned as anyone for higher rates.
On the next page, page 13, we take a closer look at fee income, that was up $1.8 million quarter-to-quarter. And was benefited by a $6.3 million MSR gain and the Reliant numbers coming in and was offset by $3.7 million in securities losses.
Excluding MSR gains in both quarters and Reliant, mortgage was down $1.2 million in the quarter, even as we had increased lock volume, locks moved up 9% to $757 million in Q1. And this was offset by a decrease in the gain on sale, as a gain on sale percentage moved back to pre-pandemic levels.
Our purchase to refi mix was 63% purchase, 37% refi. Excluding Reliant, our service charge income was down about $1 million from fourth quarter, which was in line with our estimate, when we put in the new fee schedules in November.
Next to expenses on page 14, which is a good story, as we improved our operating efficiency in the quarter to 53%. Reliant of course came into the numbers for the first time. It’s hard to tease out the components exactly. But we benefited from legacy UCBI expenses being down versus Q4 on an absolute basis by about $3 million, partially due to getting the full impact of the Aquesta cost savings. We also got half or a little more of the Reliant cost savings, which leaves us with about $2 million to $2.5 million ago, as the conversion is happening later this month.
Page 15, we had another good quarter with regards to credit quality, with net charge-off of $3 million, which is 8 basis points of loans annualized. While we had $3 million of net charge-offs, we had $23 million of loan loss provision, and along with Reliant PCD marks this increased our reserves by a good $35 million.
Of the $23.1 million provision, $18.3 came from the Reliant Double Dip, and the remaining $4.7 million was mostly due to a worse economic forecast going into our CECL model.
On page 16, you see we have generally improving trends in Special Mention and Substandard Accruing Loans, but NPA is just slightly higher. We remained optimistic about credit in 2022.
And finally, on the next page, page 17. You can see the movement in our reserve that moved to 1.02% of loans from 97 basis points with the benefit of Reliant and core provisioning that was in excess of net charge-offs.
All said, we are encouraged by the strong loan growth and the margin expansion and the efficiency improvement and look forward to the rest of 2022.
And with that, I’ll pass it back to Lynn.
Lynn Harton
Thank you, Jefferson. In closing, I’d like to recognize the United team that is listening in for two outstanding customer satisfaction awards we received this quarter. The first is from J.D. Power. This quarter, we were once again named as the annual winner in the southeast for overall customer satisfaction in retail banking. This marks eight of the last nine years, which is quite an accomplishment.
This year J.D. Power redesigned their study, and now measure satisfaction across seven factors, trust, people, account offerings, allowing customers to bank how and when they want, saving time and money, digital channels, and resolving problems or complaints. Our teams continue to set the bar for customer satisfaction across all these measures. And I couldn’t be more proud of the team for delivering in this manner.
This quarter, we were also ranked in the top 10 of the world’s best banks, according to Forbes. This list, which is based largely on customer satisfaction data compiled by Statista, a market research firm, ranked banks in 27 countries across the globe. Of the banks in the US, United ranked third, and was the top bank with a regional south-eastern presence.
For any business customer satisfaction is one of the most important long term drivers of business success, and shareholder value. So many thanks to our United team for living our vision and making a difference for our customers.
I’d like to now open the line for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jennifer Demba from Truist. Please go ahead with your question.
Jennifer Demba
Thank you. Good morning. I have two questions. First, Jefferson, given the markets expecting significant rate hikes this year, I am wondering where you think the net interest margin could go? And a much easier question is, what were the major kind of topics of discussion and focus at the leadership conference? Thanks.
Jefferson Harralson
All right, so I’ll take the first part of that, it’s – so – I mean, we have it in here in the deck, I showed you, for the first time some of our sensitivity analysis with a non-deposit maturity beta [ph] that from our experience in 2015. And it shows for H 25 [ph] rate hikes and it’s 4 basis points if you believe in that 22% beta.
The – this first one, we really haven’t moved rates at all. So I think we can get more than 4 basis points of margin expansion from the first one. And then we also have, what a plus – what 100 looks like, and that’s up $29 million. And again, it’s – as I mentioned in the prepared remarks, it’s not easy to forecast deposit beta. But I think that’s a pretty good forecast there of – what – up what 100 looks like is – helps us by $29 million.
Jennifer Demba
Lynn Harton
So you may take the leadership thing…
Jefferson Harralson
Yes…
Lynn Harton
So, yeah, it’s great question. It – really wanted to make it about leadership and so you know, I kicked it off with how to become a better leader. We also then knowing that our people will be better leaders if they understand the world better. We had Tom Brown come talk about what’s going on in the banking industry. His views on the industry and United and what we needed to do.
We had J.D. Power come in to break down the satisfaction studies that they do, what things make a difference, what moves the needle, what do we need to focus on. We had Chick-fil-A come in and talk about how to sustain a culture of service. Obviously one of the companies is best in the world at that.
We had both TTV and Q2 [ph] come in to talk about fintech. How does fintech interact with banks? What’s the future of fintech? What should we be thinking about? And then we had a board, we always find our people are interested in what the board thinks about United, so we had a board panel and finished up with an economic panel led by Tom Barkin at Fed – Richmond Fed, CEO [ph] So it’s a great time, I felt like everybody walked away with a lot to think about, lot to think about how to get better.
Jefferson Harralson
Yeah. Everybody seem very fired up. And I’ll just want throw into my last question. Those numbers are annual impacts. And to the extent the rate hikes happen in the middle of the year, you get only partial amount of that this year. So those are next 12 month impacts not quarterly, of course.
Jennifer Demba
Right. Thank you.
Operator
Our next question comes from Brad Milsaps of Piper Sandler. Please proceed with your question.
Brad Milsaps
Hey, good morning.
Lynn Harton
Good morning to you.
Brad Milsaps
Jefferson, maybe want to start with expenses. Obviously, you guys had some great expense control in the quarter, it seems a lot of moving parts. If my maths right, if expenses were down at $3 million – $3 million at standalone, UCBI means expenses, maybe were only up 2.5% year-over-year. Do you think that’s a number that’s sustainable over the balance of 2022, given you know, inflationary pressure out there, the way that you guys want to invest. Just kind of wanted to get a sense of how you’re thinking about, you know, the expense run rate?
And then I guess secondly, I know, the mortgage segment at RBNC was it part of your expense save target? I wonder how those numbers are maybe in – in the combined numbers now, have you sort of netted those together. I just didn’t quite see how they showed up. But hopefully, maybe you can – you can help me out there a little bit?
Jefferson Harralson
That is a great question. So I’ll start with that. And I can maybe go with the Reliant mortgage and Rich can chip in on that as well. So the 110 is not a bad run rate to start with. We do expect core growth off of that run rate. There is inflationary pressures out there that we’re battling on a case-by-case basis. So that is – it will be going [ph] off of that number.
Again, as I mentioned in the prepared remarks, we do have $2 million to $2.5 million of quarterly cost savings that we expect to get fully in Q3. We have this weekend coming up is the conversion. So partially through this quarter if we will get a big piece of that.
So I think if you put some core growth on the 110, maybe you’re at 111, 112 for the second quarter and a low growth right off of that because we have in the near term because we have some nice cost savings that offsets the growth rate. So it’s – that’s how I would talk about the expenses.
I’ll start with the JV. The JV, we are now as of February 17, as 0% owner of the JV and it’s in wind down mode. Now, the numbers are still in our numbers. But they are not significant. And they net to zero on the net income. And I don’t know if Rich you have more to add on that or what the opportunity that gives us.
Rich Bradshaw
Sure. Well, we are excited about the mortgage opportunity, the retail mortgage opportunity in Nashville. We’re adding – we added 10 MLOs. And that’s right now about $10 million a month in production. And we’re expecting that to grow as they understand and our programs a little bit better. We offer a little bit more than they do, so that we’re very excited about that. And we’ll continue to look to add to that.
Brad Milsaps
Okay, great. That’s very helpful. Thank you. And then just final question for me. Jefferson, can you talk about any changes in the pace of maybe how you plan to deploy, you know, the remainder of your excess liquidity as you move through 2022 maybe between loans and bonds?
Jefferson Harralson
Thank you. That is a great question, too. We have – with rates higher we have – we accelerated our securities purchases in the first quarter, I would expect to see that continue in the second quarter. I do think now with rates higher, you are going to see this slowdown in deposit growth that we’ve been seeing and you’re going to see an acceleration in this remix.
So I think you’re going to see securities purchases at a – at this pace or a little bit higher. And you’re going to see I think, this asset remix that we’ve been waiting for happen and push the margin higher throughout the year.
Brad Milsaps
Great. Thank you, guys.
Operator
Our next question comes from Catherine Mealor of KBW. Please go ahead with your question.
Catherine Mealor
Thanks. Good morning. A follow up on the margin conversation. Jefferson is the 4 basis points per 25 that type, does that include remix or is that more just kind of looking at the balance sheet [indiscernible] that’s in the balance sheet?
Jefferson Harralson
Right. That is rates [ph] only. So if you put remix in there or expect some improvement from remix. I would also expect we had an unusually low, in my mind anyway loan accretions this quarter was not particularly core. The amount of our – the accretion rolling through at the end of last quarter was $18 million. Reliant added $14 million to that. We had $3 million of accretion. But now we’re coming off a $29 million base, which is higher than where we’ve been.
So I think that probably has a little bit to the GAAP [ph] margin as well. So the – to answer your question more succinctly, the four is simply the rate change, we expect more for mix change as well.
Catherine Mealor
I think you said last quarter that accretable yield should be about $2 million to $2.5 million a quarter. Is that that’s still the case – I mean, that was just Reliant as well?
Jefferson Harralson
That – I believe that that forecast would be excluding Reliant, but Reliant expect that to be higher in the upcoming couple quarters at least.
Catherine Mealor
Got it. Okay. Got it. Okay. And then on a loan yield. Obviously, the increase in loan yield was mostly from the Reliant acquisition. And so as we think about how quickly that moves moving forward, is that – what – I guess, maybe question one is, on average where are new – where is new loan production coming on relative to that level and so you still have some kind of downward pressure as kind of fixed rate loans or repricing?
And then question two is, one thing that I’ve always thought about in your loan growth is that you’ve got the opportunity to grow with some higher yielding portfolios, like the [indiscernible] housing in Navitas. And so how much of your growth in higher yielding portfolios do you think plays into the upside of millennials [ph] through the back half of the year as well?
Jefferson Harralson
All right, great question. I’m looking at Rich here. I don’t know how we’re going to share this question a little bit. Do you want to start with what you’re seeing? And maybe in committee as far as new loan yields coming on? I don’t know if they’ve moved up?
Rich Bradshaw
Sure. I would say – I would say they wouldn’t. they haven’t moved up, but they are flattening. That would be the way I’d answer that. And certainly, we expect our clients to be looking for more fixed rate. And, you know that’s what we’re starting to hear and feel.
Jefferson Harralson
So on the existing portfolio, we have 40% of our loans that are floating now, so you’ll see that benefit, and then with a 50 basis point rate hike that moves up 46%. And then we’ll get to the full 49% variable in three to four rate hikes three to four 25 [ph] basis point rate hikes if we get those.
So you will see loan yields increase just by rates increasing. But you’ve seen I think, what I would say is, the banks in general haven’t moved up their loan pricing a lot yet, given where the curve has moved, I would expect that to happen over time, just to have a good spreads over treasury curves. Would you agree with that?
Rich Bradshaw
I agree with that Jefferson.
Catherine Mealor
And then remix into higher yielding loans, is that…
Rich Bradshaw
So Rob might step in here.
Rob Edwards
Well, I’ve just said, we’ve had great loan growth, from Navitas. And there’s no expected change in that loan growth. And then also manufactured housing, of course, is new to us. But in this first quarter, they did also grow. And so both of those portfolios, just as you expect would help – they have higher loan yields. And so we would benefit from that.
Rich Bradshaw
And Catherine, this is Rich, and one of the things we’re going to do or we are in the midst of already doing is teaming some of our non- Navitas professionals with the manufactured housing to see how we can scale up and do it in a risk, conservative manner. But we do see that opportunity. And that’s what we’re putting together right now.
Rob Edwards
And Catherine, just to add one more key status [ph] as we just looked into our ALCO deck here, and we saw that the March new and renewed yield was up 12 basis points from February.
Catherine Mealor
Great, okay. Awesome. Thanks for all the color. Appreciate it.
Operator
Our next question comes from Michael Rose of Raymond James. Please go ahead with your question.
Michael Rose
Hey. Good morning, guys. Just wanted to circle back to long growth. So I think last quarter, you know, extra line you guys have said expectations for about 7% growth this year. And if I exclude Reliant and PPP, this quarter, it looks like it annualized, its still about 9.5. So it looks like you’re tracking above that. What are kind of the puts and takes to that and should we expect kind of a higher rate of growth versus that outlook at the end of the year? Thanks,
Rich Bradshaw
Hi, Michael. This is Rich. Yeah, I’m really expecting Q2 to look like Q1. So very, very similar growth. The strong pipelines going into the quarter. This past quarter we saw our geographies be a little bit more balanced. Sometimes it’s lumpy, and we actually had three geographies competing head-to-head for top position until the last two weeks of the quarter.
So – and as it was mentioned earlier too, we saw some solid C&I performance this quarter. And we are on the hiring side. We are having some really good discussions on the middle market area, and that’s where we’ve seen significant pickup in the last 15 months.
In addition, we’ve just hired a conventional franchise team leader to build out and this would be the loan sizes greater than we do at Navitas and on the SBA side, so you know, that’s C&I as well. So we’re excited about what we see, we continue to be in great markets.
Michael Rose
Great. And then last quarter, you guys talked about selling Navitas loans, you know, about $10 million to $20 million a quarter, it looks like it was a little over 23. You know, this quarter as we move through the bulk of the year, how should we think about that? Is that 10 to 20 range still good? Or should we think about a little bit of a higher range?
Rich Bradshaw
Thanks for that question. I think $20 million, plus or minus five is the – is our target. So it could be as low as 15. I think most likely is right there around 20.
Michael Rose
Okay, great. Thanks for taking my questions.
Rich Bradshaw
Thank you.
Operator
Our next question comes from Brody Preston of Stephens Inc. Please proceed with your question.
Brody Preston
Hey. Good morning, everyone.
Lynn Harton
Hey, Brody.
Brody Preston
Hey, I’m going to – a few questions for you. I guess maybe I just wanted to piggyback on the on the Navitas. I think the gain on sale margin for Navitas came in a little bit this quarter, while the SBA use the margin held up pretty nicely. And so, you know, maybe could you help us think about, you know, what we should expect for margins on each of those – on each of those papers going forward?
Lynn Harton
Yeah. Great question. I’ll start with the Navitas part and Rich will comment on the SBA part. So think of the Navitas loans, they are fixed rate loans, and with rates moving higher, you saw a decline in the gain on sale of those Navitas loans to 3.1% from 3.8% last quarter.
You are seeing – we are pushing through some increased rates, we’ll see how successful we are as we go through the rest of the year. But if we’re successful, I think we can move back up towards that 3.8%. And if we’re not, it’ll stick around this 3.1. So I would expect it to move slowly higher in the next quarter or two, but somewhere between the 3.1 to 3.8, and I’ll pass to Rich for the for the SBA comment.
Rich Bradshaw
Sure. On the SBA, you can see we had good results from Q1. We – based on our inventory, we feel actually good about the remainder of the year. I will say that the gain on sale in the secondary market has come down just a little bit 118 to 115 on a typical mortgage. And remember, you split anything above 110 with the SBA.
So you know not material change. It’s still – those are – that’s coming off historical highs. So we still feel pretty good about the 115. And we feel good about our pipeline. So we think we’ll be fine on SBA and USDA for the rest of the year. We do some USDA on the solar products and so we feel good about that.
Lynn Harton
Typically we sell just with seasonality a little bit more every quarter throughout the year. So this will be our – this is our slowest seasonal SBA loan sale quarter generally.
Brody Preston
Got it. Thank you for that. Maybe just switch and I did have a question on the $45.6 million of Reliant loans you sold. Wanted to understand why you did that and what they were? And also was the uptick in the C&I net charges that you saw related to that sale at all?
Rob Edwards
Okay. Hey, Brody, it’s Rob. Just on the loan sale, these were loans out of market loans, which is kind of not typical for what we see at Navitas that we identified…
Lynn Harton
Reliant…
Rob Edwards
For Reliant, sorry, that we identified in the due diligence process. And so after a further study early in the quarter, we decided it was the right time to go ahead and exit those credits. So that was that.
On the – on the other, what was your – on the CNI side, on the net charge-offs, it was basically one credit. Out of our Seaside acquisition, the principal of the business passed away, and created a challenge for us in the unwinding of that business.
Brody Preston
Got it. Understood. Jefferson, you mentioned earlier that the Reliant mortgage joint venture is in the process of winding down, I’m sorry, if I missed it. But if you give a timeline for when you expect that to be done – done with?
Rob Edwards
I can, go ahead.
Jefferson Harralson
Yeah, so we signed the agreement in February, that – so they are operating on their own, and we’re continuing to fund them for six months pass that, so should be done, our part should be done by August. As part of that we, we picked up the retail piece of the joint venture, that’s where the 10 MLO’s that Rich mentioned came in. And so because that’s really – that was really our interest is both establishing and then expand in retail mortgage presence in Nashville.
Brody Preston
Got it. Okay. And maybe just on the mortgage banking real quick. So the – you know, we’re in the down cycle, I guess, phase of mortgage banking. And so I guess I want to ask you, did you fluctuate the number of producers that you had in house at all, you know, sort of during the – during the up phase of the cycle from 2020 through 2021? And if you did, could you give us a sense for how the employment levels change on percentage basis?
Jefferson Harralson
I can tell you that the answer is yes, we did uptick as the market changed. Right now we are flexing down and we’re doing that currently through attrition. Our application volume still remains strong. So we’re balancing that and managing it on a monthly or sometimes weekly basis. And I have those conversations weekly with Mike Davies, our Head of Mortgage.
Brody Preston
Got it. And then I just had two last ones for you real quick. Just on the securities, you all have grown HCM [ph] quite a bit. And, you know, you moved some of the AFS book into help the maturity this quarter. You know, I guess, like longer term, how is your thinking around what you want to do with the bond book? I mean, obviously, just as you know, as credit guys, you know, get paid to run a bond book.
So, you know, do you look at the bond book, once the cash – once the excess liquidity on the cash side has dried up and look at that as a potential source of funding loan growth, and you know, driving further improvements in the ROA going forward?
Jefferson Harralson
Definitely, so, think about it like this. So, we have about 1.7 billion [ph] of cash right now, as of quarter end, and you’re going to see that cash move into securities, and I would think our securities book would be $7.5 billion dollars or so by year end. From there, and it little bit depends on deposit growth and deposit growth is in that kind of zero to 5% range, you’re going to see the securities portfolio start to shrink, and you’re going to see loans replace securities, you’re going to see not a lot of balance sheet growth, but a lot of asset mix, change, which should be helpful to the margin and the in the ROA.
So, I think of it as a securities portfolio as a filler in a way, so it depends on deposit growth, but you should see continued rapid growth for a period of time until the cash has invested, then stables down after that as a loan to replace securities.
Brody Preston
Got it. And then for Lynn, maybe just on the M&A front. You know, I think we all understand the philosophy that you operate in terms of the type of institution you’re looking for. But I guess, as their – I want to ask differently, is there any thought given to kind of letting the flywheel spin, you know, for 18 months or so going forward and let investors and analysts see the operating profitability that you all have under the hood translate into GAAP profitability? So you can drive sort of the outside of tangible book value growth, but I think the franchise is capable of?
Lynn Harton
Yeah, so we certainly think about that Brody, the kind of the offset to that, and this is the fulcrum that we’re trying to balance is, as I mentioned in my annual letter to shareholders, there’s really only a handful of banks that are of the quality that we’re interested in, and in the markets that we want to be in.
And so once those are gone, I mean, I’m not interested in M&A for the sake of M&A for example. I mean, we’re thinking about it this morning and just since November we’ve been invited to look at three companies that are – they’re fine companies, but just in terms of the markets that they’re in and what they would add to the franchise just don’t – I’ll borrow Rich’s term, they don’t move the needle the way we’d like to do it.
And so when though one of those that are in the market, we want the quality that we want, my choices to go ahead and execute on because they’re not going to be there otherwise. And so I would love for the sellers to pace out their sales processes. I absolutely would. But I’m really slaved to what these high quality sellers in the right markets decide to do.
Brody Preston
Got it. Thank you for that. And I guess in line, I do have one more question for Rich. Rich, you mentioned the loan growth you expect it to be? I guess right now based on the activity you’re seeing similar to – in 2Q similar to 1Q is that on a $1 basis or a percentage basis?
Rich Bradshaw
It would be on a percentage basis. I expect it still to be around that 9% range.
Brody Preston
Awesome. Thank you very much for taking my questions, everyone. I really appreciate it.
Lynn Harton
Thanks, Brody.
Operator
Our next question comes from Kevin Fitzsimmons of D. A. Davidson. Please go ahead with your question.
Kevin Fitzsimmons
Hey, everyone, most of my questions have been asked already, I just had one follow up on credit. So I know it was a lumpy quarter with the Double Dip, CECL Double Dip hitting this quarter. And you guys chosen to take the reserve up. So just kind of two questions on that.
Number one, the choice to build the reserves. And I think Jefferson, you might have mentioned a worse economic forecast. Was that like, really more just taking that forecast and putting into the model? Or was that more subjective? Let’s be prudent, given the uncertainty on in the environment right now.
And then secondly, how should we look at that 1% of 2% ACL ratio going forward? Is that something that can grind down a little bit more? Or would you expect it to stay here or even expand? Thanks.
Rob Edwards
So hey, Kevin, it’s Rob. Just on the first question around the forecast, we do use the Moody’s model for the economic forecast. And if you remember, the Russian war did start in late February. So we ended up using the March economic forecast model, which did play a role and was different from the February model.
And so that’s what Jefferson I think was referencing in his comments was kind of a switch to that model. It did sort of have a bigger impact of inflation on consumer spending, combined with sort of consumers – the expectation of consumer fears in the future. So I think there was a shift in the model.
In terms of the 102, going forward, we don’t have that as a target, per se. But we do have, you know, we have had low charge-offs, you know, basically zero last year, were at 8 basis points this year. So we expect continued low charge – low charge-off environment this year, which would play a role. So the other two items in the model would be the another change in the forecast and loan growth.
Kevin Fitzsimmons
Okay. Thanks, Rob. That’s helpful. And just a quick, quick follow up. You know, given the inflationary environment, the – you know, other concerns out there potentially down the road of potential recession, are there any segments of your loan portfolio – portfolio, you’re looking at much closer.
You know, Navitas, I know, tends to have a higher loss rate over time, but that’s doing very well from everything we’ve heard. So I’m just curious, any parts of the portfolio you’re really keeping a closer eye on?
Rob Edwards
So to two things, just in terms of – I’ll just identify it as changing parts of the portfolio. So I think you’re right, Navitas came in at 9 basis points of losses for the first quarter, that’s unusual and unexpected. So in our first year 2019, first full year of Navitas they had in the 60 basis points charge off rate, and in 2020, they had in the high 70s on the basis point rate.
So we would expect that to begin. We don’t expect it, I don’t expect it to stay at 9 basis points. So something in the 50 to 60 basis point range would be much more normal. And we do expect that portfolio to normalize this year.
The other portfolio segment that we’re watching closely and actually feeling more positive about now is the Senior Care book. You know, they’ve kind of – out of our 500 million and special mention and classified loans, 200 million is the senior care portion of it. We’ve seen that the special mention and classified piece of that portfolio begin to come down and feels like there’s some positive momentum.
The first quarter is typically not a great quarter for them. But we had – we did see some improvement overall across the industry and also in our numbers there had a payoff, had an upgrade. And so we were expecting continued positive news on that portfolio.
Kevin Fitzsimmons
Okay, great. Thanks very much.
Rob Edwards
Yeah.
Operator
Our next question comes from David Bishop of Hovde Group. Please proceed with your question.
Lynn Harton
Hello, David.
David Bishop
Good morning, gentlemen. Hey, how are you?
Lynn Harton
Good.
David Bishop
Hey, quick question, Jefferson turned back to not to beat a dead horse. But in terms of the excess liquidity and the cash, if I’m doing my numbers, right, make sure I’ve got this, it sounds like you expected securities to trend up to maybe $7.5 billion [ph] does that imply that you see that [indiscernible] cash and short term liquidity end of the year, closer, maybe like that $800 million level, and that would imply about double where you entered the pandemic, and is that just sort of, you know, keeping some of that excess cash, just given what’s happened with the rate environment, just give me a little bit of a – little bit of a cushion, depending on that deposit outlook?
Jefferson Harralson
That’s exactly how I’m thinking about it. It could end up higher than the $7.5 billion. And suddenly, it also depends on what deposit growth comes – the a deposit growth comes in heavier, you might see that deposit growth, or at the securities growth to be a little higher. But $7.5 billion target does imply that we’re not all the way where we want to be in cash reinvestment by the end of the year. So you’re thinking about it exactly right.
David Bishop
Got it. And then I don’t know if I heard this. I mean, it’s out just in terms of the commercial pipeline relative to last quarter, and maybe any update in terms of what you saw inch [ph] a quarter in terms of commercial line usage trends?
Lynn Harton
David, how are you? Yes, we’re expecting fall [ph] commercial volume to be the same percentage as last quarter in the 9% range. In terms of usage on the line side, really didn’t see a change, no material change.
David Bishop
Got it. That’s all I had.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Lynn Harton for any closing remarks.
Lynn Harton
Great. Well, once again, thank you all for joining the call. We appreciate your interest in the company. Feel free to call us with any additional follow-up questions and we’ll look forward to talking to you soon. Thank you.
Operator
And thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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